London’s rental market is on fire! Demand for homes continues to outstrip supply, sending rental prices soaring to record highs.

London’s rental market has reached unprecedented levels as demand continues to outpace supply, driving rental prices to record highs. In the second quarter, average asking rents for new tenants in the capital surged, largely due to a combination of soaring demand and increased mortgage rates, prompting landlords to raise their prices.
The current average monthly rent being asked from tenants in London stands at £2,567 ($3,310), representing a significant 13.7% increase compared to the previous year, and a substantial 28% surge compared to pre-pandemic levels in 2019. Similarly, rental prices outside of London have also hit a new record, with an average of £1,231 per month, showing a remarkable 33% jump from 2019 and a 9.3% rise from the preceding year.

Exciting news from JLL’s Affordable Housing 2023 report! Projections indicate that the affordable housing market in the UK is set to witness a staggering 120% growth by 2023, driven by the increasing interest of investors.

Currently, investors own 26,400 affordable homes, with four providers dominating 85% of the market share.

The report highlights the vital role of private capital through for-profit registered providers as a significant driving force behind this remarkable growth. The affordable housing sector is expected to expand to 58,100 homes by 2023, nearly doubling the projected growth rate (65%) of residential developments with multiple homes. Additionally, the broader investor stock is anticipated to rise by 104%, reaching a substantial 258,100 homes.

Despite this promising growth, affordable housing still represents just a small portion of private investment in rental housing, with £35 billion tracked for private build-to-rent acquisitions compared to only £4 billion in affordable housing.

However, JLL predicts that this is likely to change as investors increasingly recognize the potential in the affordable housing market. Currently, affordable housing constitutes only 10% of private investment in rental housing, but the report foresees this share rising in the coming years.

With a potential demand for affordable housing expected to rise to 7.5 million households across the UK, it could become the country’s largest potential market for living investment. The report emphasizes the importance of institutional funds collaborating with for-profit providers and major housing associations to drive further growth in this sector. Although institutional capital is making significant contributions to various living sectors, unmet demand for affordable housing remains substantial, leaving many households reliant on temporary or privately rented housing.

The report’s analysis of English Housing Surveys reveals that approximately £160 billion in housing support provided over the past decade could have funded around 2.5 million new affordable homes. This underscores the urgent need to direct funding towards affordable grants to address the growing demand.

Emma Rosser, Research Associate at JLL, encourages investors to diversify their portfolios by including various tenures and housing types. Despite challenges in entering the affordable housing market, the scale of demand surpasses that of any other living sector, and with increasing financial pressures on households, this demand is expected to grow further. Institutional investors are responding to this demand and are laying the groundwork for long-term investments at scale while supporting broader social impact goals.

However, the report also highlights the issue of unmet demand within the affordable housing sector. It estimates a potential market of 6.2 million households in England, with two-thirds of these households seeking socially rented accommodation, leaving around 2.2 million households without the social housing they require.

In conclusion, the future looks promising for the UK’s affordable housing market, with investor interest and growth projections pointing towards significant expansion. The collaboration between institutional funds and housing providers will be crucial in meeting the rising demand for affordable housing and addressing the unmet needs of millions of households across the country.

Despite a drop in house price inflation to zero in May, analysts predict that Britain’s housing market will avoid a slump triggered by rising interest rates.

The Office for National Statistics reported a decline in month-on-month growth from 0.5% in April to 0% in May, resulting in an annual rate of house price inflation of 1.9%. However, the housing market is receiving support as a bigger than expected fall in UK inflation has eased concerns about sharp interest rate increases.

In contrast, the rental market is facing significant challenges, with rents soaring for the 14th consecutive month by a record 5.1%. The private rental market is struggling to meet the growing demand from individuals unable to enter the property market due to rising mortgage rates and the cost of living crisis. This has led to a decrease in property transactions and an end to the two-year, 20% price surge.

While some forecasters have predicted a potential decline in prices of 10% or more over the next year in response to interest rate hikes, Barret Kupelian, the chief economist at PwC UK, believes that the recent decline in the consumer prices index (CPI) in June may lead the Bank of England to moderate further increases in borrowing costs. This, coupled with possible real wage growth, could lead to a different housing market outlook in the coming months, possibly even showing signs of a bounceback.

Marc von Grundherr, a director of estate agents Benham & Reeves, notes that the property market is now stabilizing, with house prices returning to pre-pandemic levels.

The average house prices over the 12 months to May were £304,000 in England, £213,000 in Wales, £193,000 in Scotland, and £172,000 in Northern Ireland. The north-east experienced the highest annual percentage change among English regions, with a 4% increase in the 12 months to May 2023, while the east had the lowest at 0%.

Landlords, on the other hand, are finding it challenging to maintain rents due to cost increases that they can no longer absorb. Rising mortgage costs, increased regulatory expenses, and changes in rental income tax have left landlords with no choice but to pass these rises on to tenants.

Despite the uncertainties in the market, the housing sector remains resilient, and the dynamics of inflation and interest rates will play a critical role in determining its future trajectory.

Success in identifying mixed-use properties can be critical when it comes to Stamp Duty Land Tax (SDLT) in England. Higher rates of SDLT apply to properties consisting entirely of residential property, while lower rates are charged if the property includes non-residential land.

Distinguishing between residential and non-residential land is essential to determining the correct SDLT rate. In simple terms, residential property includes buildings used or suitable for use as a dwelling, as well as land forming part of the garden or grounds of such a building. Anything else is considered non-residential property.

A recent case, Suterwalla v HMRC [2023] UKFTT 450 (TC), resulted in a taxpayer successfully claiming mixed use, breaking HMRC’s strong record in recent SDLT cases. The key factors that supported the mixed-use claim in this case were as follows:

1. The property comprised a dwelling house, garden, and tennis court registered under one title with the Land Registry, and an adjoining paddock registered under a separate title.
2. The paddock was not visible from the house, as it was blocked from view by a large hedge, and it could be independently accessed via a bridleway.
3. The sales brochure for the property described the paddock as “almost an afterthought,” indicating that the taxpayer would not have bought it if given the choice.
4. On the same day as the property purchase, the taxpayer granted a grazing lease for £1,000 per year, allowing someone else to graze their horses in the paddock.

The First-tier Tax Tribunal considered several key points when making its decision in favor of the taxpayer:

1. For land to be considered part of a dwelling, there must be a connection between the land and the dwelling. Although the paddock was adjacent to the garden and tennis court, it could not be seen from the house and could be accessed independently.
2. Other people having rights over the land does not necessarily prevent it from being considered part of a dwelling, but there are limits. Commercial use by a third party under a commercial agreement is clearly non-residential.
3. A lease entered into at completion can be taken into account when determining the use of the land. The fact that the grazing lease took effect on the effective date of the land transaction was considered sufficient evidence of the land’s commercial nature.

Considering all these factors, the tribunal concluded that the paddock did not form part of the grounds of the property and was, therefore, not residential. As a result, the lower rate of SDLT applied to the entire transaction.

It is important to note that on November 30, 2021, HMRC issued a consultation regarding possible reforms to the SDLT rules, given the increasing trend of seeking ways to reduce SDLT bills due to rising rates and the disparity between residential and non-residential rates. Although there have been no concrete actions yet, the loss in the Suterwalla case may trigger HMRC’s renewed concern on this matter. The distinction between residential and non-residential land for SDLT purposes remains an area of interest and potential reform in the future.

London’s Mayor, Sadiq Khan, is taking action to curb the proliferation of short-term rentals in the city by proposing a licensing scheme.

He has urged the UK government to collaborate with local borough councils to implement regulations that would empower councils to limit the number of licenses issued for short-term rentals within their jurisdictions. The goal is to prevent the excessive concentration of short-term rentals in residential streets or blocks.

The need for such measures became evident when reports revealed that a staggering 90% of units in a residential block in Westminster were listed on short-term letting platforms earlier this year. As of July 2023, Airbnb alone had 81,792 properties listed in London, with 50,401 being entire properties. This means that at least one in every seventy-four homes in London is being listed for short-term rental.

Mayor Khan emphasized that while short-term rentals play a significant role in London’s tourism sector, they should not come at the expense of meeting the housing needs of its residents. He expressed the need for clarity on the number of properties being rented out beyond the permitted rules and stressed the importance of holding property owners accountable to local authorities and residents.

Currently, homeowners are allowed to rent out their properties for up to 90 days a year. However, there are concerns that many property owners in London may be violating this rule, and boroughs lack the necessary resources to effectively monitor compliance.

To address this issue and provide financial support to councils, the proposal includes the introduction of licensing fees and business rates enforcement for properties that exceed the 90-day limit. These measures would help alleviate the strain on councils, many of which have faced budget cuts in recent years, hindering their ability to enforce rules against unregistered landlords effectively.

London is not alone in facing the challenge of short-term rentals impacting the housing supply, as other global cities like Barcelona, Amsterdam, and Paris have already implemented licensing schemes. The French government has even compelled short-term letting platforms to publicly disclose listing data.

By adopting a licensing scheme, London aims to strike a balance between encouraging tourism and preserving its housing stock for its residents’ long-term needs. The collaboration between the UK government and local borough councils is seen as crucial to effectively regulate the fast-growing short-term rental market.